THE EFFECT OF DOLLARIZATION ON DEVELOPING ECONOMIES: LESSONS FROM SOMALIA’S INFORMAL MARKET

Arguments on dollarization and its effect on the economy have been published mainly on economics and financial journals, yet, little is known about Somalia’s unofficial dollarization. To contribute in that matter, this paper presents the effect of dollarization on Somali economy. The study is carried out using literature analysis. The study found out that dollarizing Somali economy brings severe economic turmoil including an absolute failure to achieve price stability in the local market. In addition, adopting this policy impedes achieving strong financial management system in the country. The study recommends that policymakers and business community should try to lessen the reliance on US dollar and encourage the use of a basket of currencies (in the short-run) while strengthening the use of local currency (in the long-run). Adopting such strategy will facilitate to avoid recurrent financial crisis which might happen if the use of US dollar as an internal currency is collapsed.